Correlation Between S A P and On4 Communications

Can any of the company-specific risk be diversified away by investing in both S A P and On4 Communications at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining S A P and On4 Communications into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SAP SE ADR and On4 Communications, you can compare the effects of market volatilities on S A P and On4 Communications and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in S A P with a short position of On4 Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of S A P and On4 Communications.

Diversification Opportunities for S A P and On4 Communications

0.26

Correlation Coefficient

S A P  On4 Communications

Modest diversification

The 3 months correlation between SAP and On4 is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding SAP SE ADR and On4 Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on On4 Communications and S A P is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on SAP SE ADR are associated (or correlated) with On4 Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of On4 Communications has no effect on the direction of S A P i.e., S A P and On4 Communications go up and down completely randomly.

Pair Corralation between S A P and On4 Communications

Considering the 90-day investment horizon S A P is expected to generate 16.08 times less return on investment than On4 Communications. But when comparing it to its historical volatility, SAP SE ADR is 25.66 times less risky than On4 Communications. It trades about 0.35 of its potential returns per unit of risk. On4 Communications is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  0.01  in On4 Communications on September 14, 2024 and sell it today you would earn a total of  0.01  from holding On4 Communications or generate 100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

SAP SE ADR  vs.  On4 Communications

SAP SE ADR

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SAP SE ADR are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting basic indicators, S A P reported solid returns over the last few months and may actually be approaching a breakup point.

On4 Communications

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in On4 Communications are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating fundamental indicators, On4 Communications demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with S A P and On4 Communications

The main advantage of trading using opposite S A P and On4 Communications positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if S A P position performs unexpectedly, On4 Communications can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in On4 Communications will offset losses from the drop in On4 Communications' long position.

The idea behind SAP SE ADR and On4 Communications pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.